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Terry Baucher says a 'rare generational shift' is taking place in international tax - and the implications will be felt for decades

Terry Baucher says a 'rare generational shift' is taking place in international tax - and the implications will be felt for decades
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By Terry Baucher*

When I consider what’s likely to have the most impact in tax this year, I keep coming back to the massive shift in attitude by tax authorities in the aftermath of the Global Financial Crisis (GFC). 

Usually changes in the tax world are incremental, but what is going on now in the field of international tax is fascinating because of its scope and speed.  It is one of those rare generational shifts, the implications of which will be felt for decades.  

In April 2009 in the wake of the GFC, members of the G20 and the Organisation of Economic Co-operation and Development (the OECD) decided to clamp down on tax havens.  Forty-two tax havens were identified as not complying with tax information exchange requirements. They were threatened with economic sanctions unless each tax haven agreed to implement a minimum of 12 Tax Information Exchange Agreements (TIEAs). 

The tax havens rolled over within five days and hundreds of TIEAs have subsequently been signed.  For example, New Zealand signed its first TIEA with a tax haven in March 2007; as of November 2014 it has signed TIEAs with 21 tax havens. 

The most extreme example of information exchange is the United States Foreign Account Tax Compliance Act (FATCA).

Under FATCA, financial institutions outside the United States are required to register and report to the US Internal Revenue Service (the IRS) details of financial accounts held by US citizens, tax residents, and many other entities including those controlled by US tax residents or US citizens.  It is extraordinary in its reach, catching not just individuals but trusts and even in some cases solicitor’s trust accounts. 

TIEAs are designed to assist tax authorities in tracking down tax evasion.  The GFC and the need to raise revenue also prompted tax authorities to review the use of tax havens in tax planning.  This resulted in the OECD’s Base Erosion and Profit Shifting (BEPS) project.

According to the OECD, BEPS is “looking at whether and why [Multinational enterprises'] taxable profits are being allocated to locations different from those where the actual business activity takes place.”  Profit shifting or “transfer pricing” has long been scrutinised by revenue authorities but what marks BEPS out is that it involves a greater degree of international co-operation. 

If you think BEPS and the other international tax initiatives are all a bit abstract and unlikely to affect the “ordinary” taxpayer, think again.  A key part of the OECD initiatives is reviewing the tax impact of the digital economy, particularly in relation to cross-border sales of goods and services.  Regardless of what is said about compliance costs, the writing is now on the wall for the exemption from GST for goods and services purchased online. 

The direct effect of BEPS on consumers is perhaps several years away, but in the meantime Inland Revenue is making full use of the information becoming available from TIEAs and other sources such as leaks by insiders.  You can be certain Inland Revenue has sent a few “Please explain” letters to those Kiwis identified in recent leaks as holding bank accounts with HSBC in Switzerland.

It’s how all this new information will be applied by tax authorities that should give everyone pause for thought, particularly when you consider what happened to Iceland during the GFC.

In October 2008 in the middle of the GFC, the British Government invoked special anti-terrorist legislation enacted after the 9/11 attacks to freeze the Icelandic bank Landsbanki's estimated £7bn of UK assets.

The British legislation authorised such action if  "action to the detriment of the United Kingdom's economy (or part of it) has been or is likely to be taken by a person or persons". The freezing order effectively equated the monumental incompetence of the Icelandic banks - which nearly bankrupted Iceland - with the actions of Osama Bin Laden.  Understandably, the Icelandic PM Geir Haarde was outraged by Britain’s move, describing it (with some understatement) as a “completely unfriendly act”.  (Haarde resigned in February 2009 and was later indicted for negligence in office.  He was found guilty of a minor offence but escaped without punishment).

The British action caused a stir at the time but the creative use of legislation in ways not originally intended is nothing unusual, particularly when a state’s finances are under pressure.  We should therefore not assume that the New Zealand Government could not get similarly creative if required. 

Last year at a special seminar on tax evasion, Inland Revenue officials raised the possibility of using anti-money laundering legislation to counter tax evasion.  (One attraction of doing so is that institutions reporting suspicious transactions cannot advise the account holder that they have done so).  Several in the audience questioned the idea. 

Our objections were not based on legal issues, because, as Inland Revenue observed, tax evasion is money laundering in its simplest form, but one of perception.  We suggested that the public views money laundering as something done by “serious” criminals involving drug trafficking, prostitution, people smuggling or terrorism.  In other words, bad people doing bad things. 

We argued that the public would not perceive tradesman accepting cash for a job and then not declaring the income as being the proper targets of anti-money laundering legislation.  Our view was that using anti-money laundering provisions in such circumstances could be seen as overkill and possibly prove counter-productive. 

We also raised the point that Inland Revenue’s existing powers should be sufficient.  They certainly were when detecting Alex Swney’s tax evasion, which was identified after a routine cross-check of Heart of the City’s GST filings.

What all this illustrates is that everyone should be aware that following the GFC tax authorities are sharing unprecedented amounts of information very freely.  TIEAs and other initiatives such as FATCA have boosted Inland Revenue’s already considerable powers of information gathering.  Inland Revenue can now track vast numbers of transactions and quickly identify any “suspicious” transaction. 

It’s a Brave New World of tax where Big Brother is watching and the net is closing in on tax evaders.

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*Terry Baucher is an Auckland-based tax specialist and head of Baucher Consulting. You can contact him here »

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42 Comments

Not paying GST for online overseas purchases is a nice perk, but I wouldn't miss it.  Tax cheats are crooks, and should be treated as crooks, its impossible for the average PAYE earner to be a tax cheat, cracking down on the rich pricks that break the law is well overdue!  Lock em up with the other freaks in jail, instead of robbing banks they are robbing hard working kiwis out of pure greed.

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I think you should be looking at those PAYE earners again!!.....Business has to keep records of where they spend......the PAYE earner doesn't!

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The PAYE however is already very heavily taxed, yet some ppl/sectors lightly or un-taxed even.

Now does getting rid of GST make sense? actually I am tempted to say yes if we can get to the stage that a tax at one point in the chain eg PAYE cannot be dodged.

 

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The business is taxed at 30% same as highest PAYE earners.  doesn't matter what the profit was.

The business is taxed for GST on profits, same as the PAYE.  In fact the business gets taxed MORE gst than the paye, because the PAYE doesn't pay wages, a business must make enough revenue to pay wages, and pays GST to the IRD for that revenue.

The PAYE person doesn't normally have GST expenses in the direct sale of labour, so effectively gets to claim all the GST back.

A business does get to claim refund GST of capital purchases (which is a little odd), but depreciation doesn't carry a GST component either and that cost must be recovered so the GST does get attached to revenue, but no GST deduction is available via depreciation.

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Actually the top rate for PAYE is 34.45%  (33% + 1.45% ACC levy)

http://www.ird.govt.nz/how-to/taxrates-codes/itaxsalaryandwage-incometa…

 

 

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As a farmer my ACC levy is over 5%. It infuriates me that as a rather careful person I am treated the same as a 20 year old male farm recruit. That is theft. I also pay for all those sportsmen ie rugby netballers and motocrossers who damage themselves every weekend religiously.

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Belle, I thought you only worked, 'part time'.

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ACC statisically derives the % based on the accident rate of the sector and not the individual.  So i'd guess that as a mature and experienced farmer you are indeed low risk but are paying for the next generation who are not. ie their accident rate but be 8% while yours is 2%...

No sportsmen have a far higher rate I believe.

 

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PAYE earners have paid tax before they spend, businesses pay after they spend, hence the difference.

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No.

PAYE pay tax after they have made sale of labour, the purchaser is forced to do all the paperwork for them, and make payment for them at time of payment.

Businesses must calculate what they are going to owe, and pay provisional tax based on that, for some businesses thats before they get paid.    Money used for capital purchases is either borrowed or from cash reserves.  The cash reserves are tax paid.  Borrowing is just same as PAYE, tax is paid as it's earned in that period.

you are aware that both PAYE earners and businesses don't pay INC on income generation expenses, right?

 

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PAYE pays before they spend, business doesn't, it's simple really.  You pay provisional as an estimate, but the final calculation comes from a figure that you cannot get before you include spending.  You don't pay tax on income you havn't recieved, either.  It's hard to understand what you are saying No to.

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Skudiv....that's a kindergarten version if ever I read one....not in business I take it !!!

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You'd be wrong there.  Whats new eh?

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Quite happy to be wrong Skudiv!

"You don't pay tax on income you haven't received either"  yet every dollar of stock-on-hand is treated as taxable income!

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You mean the difference between stock value at the start of the year and at the end of the year, minus costs of sales.  True enough, hopefully you can sell that inventory before you actually have to pay the tax on it.  So it gets treated as sold for the calculation and if you haven't sold it before your final tax bill is due in 10 months time then yes you will be paying tax on income you haven't earned.  I don't know how common that is though.

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Totally agree.

Better yet I think the so called professionals who advise them should a) also be fined a % of the sum for the tax evasion of their clients and  if their clients go to jail, so should they.

 

 

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The interesting thing is even when I bring in goods and pay the landing fee, GST and shipping I still save $s.  One of the biggest things though is I get the choice or even just the availability.  Recently I got a pair of shoes via Amazon, $127NZ v $160NZ except they were in the size and style/colour I needed/wanted, sure I saved $30NZ but really it was the fact I could get the right size when no one in NZ could/would do it. 

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That GST skip is only for minor items (eg under $1000, and not trade account)

The level playing field would be worthwhile but how to monitor and collect it - especially for electronic items (in-game purchases or ebooks)

it is very easy for PAYE earners to be tax cheats.  If you don't know how then thats you problem... you know many of them don't even keep timesheets or contracts on people they interact with !

as for robbing you?  it's not your money, it's their's (the rich people) all they're doing is using a system that is different to the system you want to use which says you're entitled to stuff you haven't earnt.  that's hardly theft on their part.

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...last time i looked paye was hardly an easy cheat, unless you are referring to the spend side of the equation (ie cash payments to tradies) which is is not a paye 'earner' issue.   - or perhaps the small buiness who will provide cash or product in lieu. For most on paye there is no out -   loss offsets for other activities aside.

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cash to tradies isn't really a bonus to anyone unless the tradies can keep it off the books.
one benefit to PAYE, is if it isn't your main job you can make time trades, use volunters and barter, do hobbies off the balance sheet, have hardly any compliance paperwork to bother about, can borrow or lend you goods with no extra charge or fringe benefit arrangement, nor is there any requirement for related party loan interest or other legislative "big brother".  Likewise you can help others out, or get favours done without employment contracts exposure, nor the legal requirement of minimum wage.

PAYE is simply a tax on profit from sale of labour, deducted at payment time.  But it can be easily calculated...by the employer.

As opposed to the INC for businesses, first up INC for Ltd companies is due in the year it's earnt.  Unlike PAYE which is deducted at pay date based on amount paid, the INC is required to be correctly paid in advance installments (provisional tax) and penalties apply if the business does well and early provision tax payments aren't high enough.  On some business the first quarter can be more tax than profit (if they make most of their profit in last two quarters, as in business most costs are front loaded - eg a trucker has to pay for diesil before he can fufil deliveries, and must register and RUC his vehicle before it is allowed on the road.   
 A PAYE person has few upfront business costs to provide their saleable product, and deductions are made from the profit.   Likewise they get few deductions as the labour has few expenses directly related to it so most of the revenue is profit.

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It is actually theft when you use NZ money, in the NZ economy and avoid paying taxes.  Thats the law and it is an obligation on those who want to do business in NZ.  It puts the burden on those who pay their taxes, while tax avoiders are free loaders on the system.  A system built and paid for by the blood and sweat of generations of hard working law abiding kiwis.

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No it's not theft because the NZ money is a fungible token enforced on the populace.
NZ people who are wanting to engage in trade in NZ are engaging in a natural right that is part of the normal behave of all humans.

NZ government are taking advantage of that, at threat of their monopoly on violence being used, to enforce use of their fiat currency.  We have no more "obligation" to that government than we do to the Pope, to the Bank owners, to President Obama, or to the current head of Coca Cola.  Each would expect us to use their product and follow our obligations that we owe to them and obey their laws, and each would decalre that they have the right to force us to use their product and thus that we must owe them.

The government are merely a bunch of caretakers nominated to a guardianship role to look after communal property as specialists that weren't much good at more productive private endeavors.  That they see themselves as defacto owners or regents or leaders just cements their foolishness and predicts the damage they will do in their ignorance.

theft is when you take something which doesn't belong to you without freely given permission.   NZ fungible tokens are representative of a persons profit from trade, the trade belongs to the person, seizure of all of some of the tokens are seizure of that persons results of their endeavours - they're fungible forms of exchange .... and if you use other forms of tokens.. the government will still insist on their cut, after exchange into their tokenage.  As a token they represent that persons resources - seizure of them is the same as seizure of that person resources... that persons life hours.  And that does NOT belong to the government.

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Taxes aren't for government, taxes are for society, they are also the cost of being part of society.  If you don't want to pay taxes, stop free-loading off a society of taxpayers, and go live in a society where there are no taxes.  If you just want to take advantage of all the benefits that come from a scoiety where everyone pays taxes, and accuse government of theft when they expect you to pay your part, I can only conclude you lack morals. 

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Well spoken skudiv - send them to go and live in a tax haven like the Cayman islands if they like it so much.

 

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Cowboy - and if that trader uses the taxpayers roads to get to their place of profit making and does not pay then that trader is a thief.

 

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Skudiv............what a load of bollocks......people couldn't be trusted to pay their taxes and that is why we have the system we have now....the few collecting for the many!!!! So don't go giving us that last sentence drivel!!

 

 

Businesses constantly get audited and there are heaps of checks and balances along the way then there are the ceaseless regulatory requirements that keep business far too busy to be in the game of tax avoider/evader.......I know heaps of people who hide behind the title employee on PAYE.....they know they are under the radar with the IRD........they are the worse tax avoiders/evaders around........it only takes 1 million employees ripping the system off at say on average of $50 P/W even if it is a 1/2 million people the figures still stack up........The IRD is not doing its job when it knows historically who the offenders are (individual employees) and then completely dismisses this large group as not being important enough to put resources into..........the system was built by the public services for the public services on the blood sweat and tears of business!!!!

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Skudiv - that is why we need to get rid of all the stupid tax system and just have a flat turnover tax.

Or a property tax

Either way we still have to pay

Government corruption with those taxes is another issue.

 

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I think we are talking about different systems(?)  I was referring to our schools, roads, hospitals, police force, defence force etc all the things that have been built and paid for with and by taxpayers (and yes that includes business taxpayers).  All those things that make NZ a much better place to do business then for example Afghanistan where tax is pretty much voluntary. 

It seems like you are unhappy with the tax system(?)  A simpler tax system would be better.  I have no idea what your specific issue is regarding PAYE though?  People can hide behind this?  Are you saying employers are not calculating PAYE correctly?

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I think Terry's statement below pretty much sums up not only the tax police but most of our bureaucratic officials.......

"The British action caused a stir at the time but the creative use of legislation in ways not originally intended is nothing unusual, particularly when a state’s finances are under pressure.  We should therefore not assume that the New Zealand Government could not get similarly creative if required. "

 

Given that most of NZ'ers already know that there is creative use of legislation by those administering, in ways that were never intended and given that we have an Interpretation Act, NZ Bill of Rights, Universal Declaration of Human Rights, Magna Carta, Bill of Rights 1688, Habeas Corpus, Privacy Act and a plethora of other inividual protections granted to the people I can't help but wonder who the real money-laundering, tax evading terrorist/criminals are.........

 

What organisation monitors the sanity of bureaucrats?......Is it a tradie or anyone else doing a cash job...or the person undertaking the paying who is avoiding/evading the taxes?

The first place the IRD should be looking at tax-dodgers is within the ranks of the public services......look inside.......and while you're at it please think about training some of your staff.........hint the difference between terminal and provisional tax, how different balance dates affect personal filings.....and......don't use the earthquake havoc to make records of late filing history against businesses or individuals!!!!

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I'm told that introducing a 2% financial transactions tax would enable the scrapping of company and personal tax Plus lowering of GST to around 5 to 7.5%.

This sounds good to me. A simple way to make sure everybody pays their share towards maintaining the society we have.

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I'd be quite happy with a Automatic Payment Transaction Tax or APTT...... no exemptions!!!!   NO GST, no PAYE, NO annual filings to the IRD, no fringe benefit tax etc....you buy what you want and when you pay the tax component is diverted by the bank to the Government coffers.  They get their loot instantly and business doesn't have to put so many resources into tax compliance. International transactions get caught in the loop......even the money launderers would be paying their share....the only issue is the black-market and that can be overcome with a new designed currency every so often......and when they have to bank those old notes they will at least pay their APTT........cannot see they IRD making these types of recommendations to the Minister as there is of course a job protection mentality in the Public services (including the IRD) which requires reporting to the appropriate MInister in a certain way and never once giving a toss about those who bare the time and costs..........

 

It is absolutely rediculous that the main advisors to any Government should be its own Institutions and  the professional fields.......both have a conflict of interest.

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When people say "Its my money" technically they are wrong.

As all money is created from debt then you only have the use of that money until such time as that debt is repaid.

Money is such that we do not own it, we only have the use of it. Until it is repayed it belongs to the bank.

 

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It's not quite that simple I thought - money circulates, and once its created it tends to stay created. When you repay debt, that money doesn't go *poof*, it becomes profit, is lent out again, is distributed to shareholders of the bank, is paid to the bank's staff etc. Or am I missing something?

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taxation and interest, kill the money, that's where it goes poof.  That's why electronic models can be used to currentcy :)

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When taxed, the government circulates it back into the economy though right, and interest goes back to the bank and is redistributed in the ways mentioned? I guess if it's a foreign bank the money sort of goes *poof* in that it disappears overseas for a while, but surely this can only happen up to a point right - currency exchange rate being the limiting factor?

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no they don't.

They borrow new money from banks and bonds and release that fresh into the infrastructure companies. the tax disappears into offshore interest or into dead pools of equity (ie removed from circulation and economy)
...which is why it is so vital that austerity is applied to governments, not to productive private sector.  "Money" is peoples' debt hours...their life hours, of which "a government" has none of it's own (it is the consumer)

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What an interesting Q.

 

 

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if you _actually_ try barter or things like using gold or alternative currency then they still try to tax you for it.   therefore your technicality is incorrect.... it's a fungible token that does belong to you (by contracts as you've pointed out).
 The government just tries to steal sum regardless of currency or type of money.   Or like the US, they try to steal other peoples' money when they're in other countries !

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Couldn't care less if they scrapped corporate tax altogether. Ultimately, people consume and enjoy the benefits of money, not companies. In the absence of company tax prices can be lower - the only entity worse off is the government, so we'd need to raise other taxes, but in all reality we're paying it, not the company, so net effect should be nil. Company tax is simply a neat way of disguising what you as an individual contribute in tax.

What's to stop profits rising rather than prices dropping? The same thing preventing it now - competition.

Surely such a system would be easier to administer, remove the need to compete on corporate tax rates and simplify the tax system.

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corporate tax NEEDS to be set at the top of the PAYE scale.  

(1) Corporations are non-natural born citizens with rights and benefits etc.
(2) Setting the corporate rate to the to of the PAYE scale stops the "how to get rich the american way" by putting all your property and expenses through the company/business.  By aligning the two scales there's no benefit from such complexity/avoidance.

(which is why I question how IRD can say such activity or use of Trusts is tax avoidance, if the tax is paid at the top rate)

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The tax system we have is rubbish. If I farm a beef cow system and finish the offspring I have a minimum of four years in which I pay tax and ACC on stock before I get paid. So why would I. This year each of my yearling bulls were worth to me $2000. How much to the export earnings of the country who knows. But I sold their mothers because the tax regime of this country made that system unprofitable to me. Ridiculous.

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A fair system of tax and income is urgently required.

Bottom up, not Top Down.

Basic wage rises by 50c per hour taxed on every cent for the poorly paid PAYE crowd.

Employ Public Servants, so called Members of Parliament, enjoy 5.5% gain backdated to July to aid their pension funds and pay off their second and third houses...they have duly rigged the tax network to avoid any involvement on their huge Capital Gains and stall cheaper building..to house the basic wage crowd.......yet again.

Classic Tui.

Classic NZ money rigged avoidance, no wonder the Immigrants want in....cannot fail.

Just who is stupid ??............the average basic wage New Zealander, that is who?

When you make the rules, rulers win.

 

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